A fairly common question asked is this…
I’m a high-income earner. I want to save above and beyond my maximum 401(k) contributions. I was told I don’t qualify to contribute to an IRA. Is that true?
A lot of people get confused about this, including CPAs and financial advisors.
There are only 2 requirements a US taxpayer must meet to qualify for making a Traditional IRA contribution:
- I will not reach age 70 ½ by the end of the year.
- I must have received “taxable compensation” during the tax year. Or if I file a joint return with my spouse, he or she must have taxable compensation during the tax year.
Now there are other technicalities1, but those are the two general qualifications. It doesn’t matter if my income was $300,000 or $1 million or even more. As long as I meet these 2 guidelines, I can contribute to a Traditional IRA (For simplicity, I’m going to refer to a Traditional IRA as an “IRA”).
Here’s why people get confused. My high level of income may not allow me to take a tax deduction for my IRA contribution. My tax deduction may be limited or eliminated if I am (and/or my spouse is) covered by an employer-sponsored retirement plan. For example, if I am covered by a plan through my employer but my spouse is not, we cannot receive tax deductions for IRA contributions if our Modified Adjusted Gross Income exceeds $193,000 in 2015 if we file a joint tax return. We can make IRA contributions, but they just wouldn’t be tax deductible.
Now, perhaps these people are asking the wrong questions? Maybe we should first ask other questions such as…
- Should I contribute to an IRA?
- Or would a Roth IRA contribution be better for me?
- Or if I don’t qualify for a Roth IRA contribution, how else should I save?
Asking good questions can help ensure we become better-informed investors. We believe these questions (and many others) are best answered in the context of one’s specific situation by a team of experienced professionals.
Published: December 30, 2015
Author: Terry Prather, CFP®, ChFC®, MSFS
Phone: (812) 602-6307
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